Brokers warn of tougher times ahead as lenders raise rates

A second round of belt-tightening by mortgage lenders could leave many borrowers facing a tough 2008, brokers warned yesterday. While some lenders have cut their short-term fixed rate mortgages in recent weeks, the general message was that the fallout from Northern Rock and the global credit crunch would lead to a rise in rates.

The financial pain would be felt by tens of thousands of borrowers coming to the end of historically cheap deals, and homeowners who pay off standard variable rate (SVR) loans.

James Cotton, at broker London & Country mortgages, said: "It doesn't look like the current situation will correct itself soon." He said expectations that the lenders would return to cut-throat competition was unlikely, and borrowers would end up paying a higher price.

Ray Boulger, of broker Charcol, said property prices would fall in the first half of 2008, especially if the Bank of England refused to cut interest rates early. "The most pain will be felt in cities where there is an oversupply of two-bed flats. They could decline by a further 10%. But prices will also fall across the board by as much as 5%."

Boulger said he expected a lack of supply in the market to put a floor under any house price falls. "With transactions down 25% on last year, and no signs of them picking up, you have a shortage of supply out there."

However, the stance of the Bank would play a crucial role. "I think there is a danger the Bank will play hardball, and in such an aggressive way that it severely knocks people's confidence in the property market.

Financial data provider Moneyfacts said it had started to see some mainstream lenders increase their standard variable rates even without the spur of a base rate rise. Standard Life Bank recently increased its SVR by 0.15% to 7.46% or 7.66%; Moneyfacts warned that others might follow.

Julia Harris, mortgage expert at Moneyfacts.co.uk, an independent comparison site, commented: "It is very rare to see a lender increase its SVR outside a base rate change. It could very well be the first sign that the mainstream 'prime' mortgage is feeling the pinch of the credit crisis."

Most lenders have spent the past couple of years clawing back the costs of marketing and commissions by increasing application fees for their mortgage products. Fees have commonly been increased to £1,000 for two-year products. Brokers said there was now a steady trend for further increases in fees which can top £2,000 for large mortgages with heavy initial discounts.

Discounted variable rate mortgages have seen cost increases in recent weeks at Abbey, Bristol & West, and Norwich & Peterborough. So far the rises are only minimal, between 0.1% and 0.3%, but that will leave many homeowners currently on low fixed rates dating back to 2005 paying much higher mortgage costs.

Cotton said that there were still lenders prepared to offer mortgages to people with poor credit records, but they were being forced to pay a higher price. Birmingham Midshires will consider customers with county court judgment bills up to £10,000 and six months' arrears in the last year on other loans. "There are also plenty of 100% mortgages around with Scottish Widows, Abbey, Bristol & West all offering loans without a deposit," he said.

Northern Rock, the beleaguered north-east based bank, was forced to raise rates following its near-collapse, and has been unable to cut them due to the ongoing credit crunch.

The number's up

5% The amount by which property prices will fall next year, according to Ray Boulger of Charcol

£2,000 Typical fee for a large mortgage with heavy initial discounts

0.15% How much Standard Life recently raised its standard variable rate

£10,000 Some lenders will accept customers with this kind of county court debt